Wednesday Feb 7 2024 14:29
4 min
An increasing number of analysts are predicting the U.S. will see its first interest rate cut this summer, and stock markets are adjusting to this evolving perspective.
The CME Fedwatch tool is currently showing traders pricing in an 83% chance the Fed will keep rates steady in March, with bets steadily dialling up bets for a similar move in May.
This shift in expectations comes on the heels of recent strong job and economic growth figures, coupled with Federal Reserve Chair Jerome Powell's more cautious tone over the weekend, leading to a reevaluation of previous predictions for rate cuts.
Deutsche Bank's strategists, who are taking a more optimistic stance, suggest that those expecting a downturn might face challenges this year.
Initially forecasting an economic slowdown in April 2022 and anticipating a U.S. recession within two years, the bank has now revised its outlook.
It predicts a steady growth rate of 1.9% for 2024 (measured from Q4 to Q4) and anticipates the first Federal Reserve rate cut in June, but only by a total of 100 basis points, signaling a departure from earlier recession forecasts.
In a research note shared with MarketWatch, a team led by Matthew Luzzetti, Deutsche Bank’s Chief U.S. Economist, wrote:
“When we first adopted a mild recession as our baseline forecast, a key element was that, with an economy far from the Fed’s objectives, the history of central bank-induced disinflations showed the path to a soft landing was narrow if not unprecedented. We now think the economy will land on this narrow path and that a recession will be averted with limited cost in the labor market”.
“We see virtuous dynamics at play that could extend these positive developments, including an easing of financial conditions that has trimmed downside risks to growth”.
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Luzzetti and his team added that the pace of monetary tightening “has eased noticeably” and financial conditions have grown more supportive.
The Deutsche Bank economists noted that the strength of consumer spending has been “surprising,” as they expected goods spending to eventually revert to a pre-COVID trend. Higher expenditure on goods seems to be “the new normal,” they say.
“Households have weathered these conditions and the return of student debt payments and sentiment has rebounded as inflation declined, real income growth picked up, and risk assets remain buoyant. Conversely, we see reasonable prospects that growth continues to surprise to the upside, particularly as financial conditions have eased and with the potential for stronger productivity to continue to provide a boost”.
It's worth noting that Deutsche Bank's year-end prediction for the S&P 500 stands at 5,100, positioning it as one of the most bullish forecasts among Wall Street analysts. This projection also accounted for an anticipated brief, mild recession — a forecast that appears to have since been revised.
Deutsche Bank’s peers were no less bullish, with UBS issuing an S&P 500 forecast of 5,150 in mid-January, while Goldman Sachs eyed a similar target of 5,100 for 2024 in early December last year.
At the time of writing, the S&P 500 index was up 3.87% year-to-date, last closing at 5,954.23 and veering closer to the 5,000 level. As of February 2024, the index has grown nearly five-fold over the last 14-15 years.
When considering indices for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss.
Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.
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